Hindustan Unilever: Profit margin takes a back seat to growth

The plan is to step up investments in advertising & promotion, trade channel spends and brand development across segments, especially beauty & wellbeing. The fast-moving consumer goods (FMCG) company aims to deliver the right price-to-value proposition to consumers. As such, it expects Ebitda margin to be in the range of 22-23%, which is 100 basis points (bps) lower than its earlier guidance. Ebitda is earnings before interest, tax, depreciation and amortization. 100 basis points is 1%.

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This is a negative surprise, especially with key raw material prices dropping sharply of late, said Mihir Shah, analyst at Nomura Financial Advisory and Securities (India). HUL expects near-to-medium term gross margin to moderate as well.

Analysts cut earnings estimates 

Against this backdrop, it’s no surprise that analysts rushed to trim their earnings estimates. “While this change in operating profit margin guidance has led to a 5.5% earnings-per-share cut each in our FY26-27 forecasts, we believe this step is in the right direction and can revive the weak volume growth and enhance HUL’s competitiveness," Shah wrote in a report on 25 April. 

Analysts at JM Financial Institutional Securities expect sales growth to accelerate over FY26/27, but factoring in lower margins in the near-term has led to earnings cuts of about 4-5% for its FY26/27 estimates.

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HUL expects sales growth to improve gradually over the year, driven by portfolio transformation and improving macro-conditions that could result in a better first half of FY26 than the second half of FY25. Factors such as good agri output, benefits from income tax relief, and lower food inflation are likely to have a positive influence on demand in the next couple of quarters. Overall price growth is expected to be in low single digits if commodities remain where they are.

In the March quarter (Q4FY25), HUL’s underlying volume growth (UVG) of 2% was above estimates and also better than in Q3, when it came in flattish. Still, this was hardly a notable improvement, and reflected persistent weak demand. Rural demand in the FMCG market continued to beat urban demand. HUL’s Q4 volume growth was supported by mid-single-digit growth in home care and low-single-digit growth in beauty & wellbeing.

Winners and losers

Within home care, premium fabric wash and fabric conditioners outperformed, and the liquids portfolio continued to report double-digit volume growth. However, pricing remained negative in the home care business, driven by commodity deflation and continued competitive pricing actions. In beauty & wellbeing, hair care saw double-digit growth led by volume, but skin care and colour cosmetics disappointed.

HUL’s personal care segment saw a low-single-digit drop in volume, with skin cleansing and oral care categories reporting low-single-digit growth. Meanwhile, the foods segment clocked a mid-single-digit decline in volume.

The company’s operating profit margin contracted 34 bps year-on-year to 22.8%, which wasn’t exactly thrilling. HUL’s shares are down more than 4% since the results were announced, and the outlook is dull. 

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“We like HUL’s thrust on portfolio transformation (beauty), volume market share (detergents, personal wash, tea) and growth revival (nutrition, Lifebuoy, GAL). That said, FY26E could be another year of sub-5% EPS growth even as these initiatives will likely propel growth," said a Kotak Institutional Equities report dated 25 April.

Sure, HUL remains committed to its medium-to-long term guidance of modest double-digit EPS growth. To achieve this, the company needs volume and pricing growth in the FMCG market growth to improve. For now, until HUL’s volume growth picks up significantly, the Street may not be too excited about near-term visibility, unless margin recovery surpasses expectations. The stock trades at 49 times estimated FY26 earnings, as per Bloomberg consensus.